(Note: This article appears as Mackinac
Center President Lawrence W.. Reed's "Ideas and Consequences" column in the
March 2008 edition of The Freeman, published by the
Foundation for Economic Education.)
Two
hundred and thirty years ago this month in Valley Forge, Penn., the brutal and
storied winter of 1777-78 came to a long-awaited close. Nearly a quarter of
George Washington’s Continental Army troops encamped there had died — victims of
hunger, exposure and disease. Almost every American knows that much, but few can
tell you why Congress was as much to blame as the weather.
For six
years — from 1775 until 1781 — representatives from the 13 colonies (states
after July 4, 1776) met and legislated as the Second Continental Congress. They
were America’s de facto central government during most of the Revolutionary War
and included some of the greatest minds and admirable patriots of the day. Among
their number were Thomas Jefferson, Benjamin Franklin, John and Sam Adams,
Alexander Hamilton, Patrick Henry, John Jay, James Madison and Benjamin Rush.
The Second Continental Congress produced and ratified the Declaration of
Independence and the country’s first written constitution, the Articles of
Confederation. It also ruined a currency and very nearly the fledgling nation in
the process, proving that even the best of men with the noblest of intentions
sometimes must learn economics the hard way.
Governments derive their revenues primarily from one, two, or all three of these
sources: taxation, borrowing and inflating the currency. Americans were deemed
to be in no mood to replace London’s taxes with local ones so the Second
Continental Congress, which faced no legal prohibition to tax, opted not to. It
borrowed considerable sums by issuing bills of credit, but with few moneyed
interests willing to risk their capital to take on the British Empire, the
expenses of war and government could hardly be covered that way. What the
Congress chose as its principal fundraising method is revealed by this statement
of a delegate during the financing debate: "Do you think, gentlemen, that I will
consent to load my constituents with taxes when we can send to our printer and
get a wagon-load of money, one quire of which will pay for the whole?"
Reports
of the deliberations that led to the printing of paper money are sketchy, but
indications are that support for it was probably not universal. John Adams, for
instance, was a known opponent. He once referred to the idea as "theft" and
"ruinous." Nonetheless, he and Ben Franklin were among five committee members
appointed to engrave the plates, procure the paper and arrange for the first
printing of Continental dollars in July 1775. Many delegates were convinced that
issuing unbacked paper would somehow bind the colonies together in the common
cause against Britain.
In any
event, not even the skeptics foresaw the bottom of the slippery slope that began
with the first $2 million printed on July 21. Just four days later, another $1
million was authorized. Franklin actually wanted to stop the presses with the
initial issue and opposed the second batch but the temptation to print proved
too alluring. By the end of 1775, another $3 million in notes was printed. After
war erupted, the states demanded more paper Continentals from Congress. A fourth
issue — this time for $4 million — was ordered in February 1776, followed by $5
million more just five months later and another $10 million before the year was
out.
In the
marketplace, the paper notes fell in value even before independence was
declared. The consequences of paper inflation at the hands of American patriots
were no different from what they ever were (or still are) when rampant expansion
of the money supply is conducted by rogues or dictators: prices rise, savings
evaporate and governments resort to draconian measures to stymie the effects of
their own folly. As author Ayn Rand would advise in another context nearly two
centuries later, "We can evade reality, but we cannot evade the consequences of
evading reality."
Americans
increasingly refused to accept payment in the Continental dollar. To keep the
depreciating notes in circulation, Congress and the states enacted legal tender
laws, measures that are hardly necessary if people have confidence in the
soundness of the money. Though he used the power sparingly, Washington, was
vested by Congress with authority to seize whatever provisions the army needed
and imprison merchants and farmers who wouldn’t sell goods for Continentals. At
harvest time in 1777, with winter approaching and the army in desperate need of
supplies, even farmers who supported independence preferred to sell food to the
redcoats because they paid in real money — gold and silver. Washington
ordered guards placed along the Schuylkill River to stop supplies from reaching
the British.
Congress
cranked out another 13 million paper dollars in 1777. With prices soaring, the
Pennsylvania Legislature compounded the effects of bad policy: It imposed price
controls on precisely those commodities required by the army. Washington’s
11,000 men at Valley Forge froze and starved while not far away the British army
spent the winter in relative comfort, subsisting on the year’s ample local
crops. It wasn’t the world’s first, nor would it be its last, experiment with
price controls. It was, indeed, the umpteenth time a government tried them, and
the results were the same as in every instance since Hammurabi gave them a whirl
in Babylon in 1750 B.C.
Congress
recognized the mistake on June 4, 1778, when it adopted a resolution urging the
states to repeal all price controls, declaring such strictures "not only
ineffectual for the purposes proposed, but likewise productive of very evil
consequences to the great detriment of the public service and grievous
oppression of individuals." But the printing presses rolled on, belching out 63
million more paper Continentals in 1778 and 90 million in 1779. By 1780, the
stuff was virtually worthless, giving rise to a phrase familiar to Americans for
generations: "not worth a Continental."
A
currency reform in 1780 asked everyone to turn in the old money for a new one at
the ratio of 20-to-1. Congress offered to redeem the paper in gold in 1786, but
this didn’t wash with a citizenry already burned by paper promises. The new
currency plummeted in value until Congress was forced to get honest. By 1781, it
abandoned its legal tender laws and started paying for supplies in whatever gold
and silver it could muster from the states or convince a friend (like France) to
lend it. Not by coincidence, supplies and morale improved, which helped to bring
the war to a successful end just two years later.
The early
years of our War for Independence were truly, as Tom Paine wrote, "times that
try men’s souls" and not just because of Mother Nature and British troops.
Pelatiah Webster, America’s first economist, summed up our own errors rather
well when he wrote, "The people of the states had been . . . put out of humor by
so many tender acts, limitations of prices, and other compulsory methods to
force value into paper money . . . and by so many vain funding schemes,
declarations and promises, all of which issued from Congress but died under the
most zealous efforts to put them into operation and effect."
History
texts often bestow great credit on the men of the Second Continental Congress
for winning American independence. A case can also be made, however, that we won
it in spite of them.
#####
Lawrence W. Reed is president of the Mackinac
Center for Public Policy, a research and educational institute headquartered in
Midland, Mich. Permission to reprint in whole or in part is hereby granted,
provided that the author and the Center are properly cited.
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